As an independent contractor (IC), you have most likely heard of the risk of reclassification. This is when a worker who is engaged as an independent is reclassified by a Federal or State government agency as an employee of the client; the result being painful liabilities incurred by the client. You, the contractor, are sure to suffer some consequences as well. The most immediate could be the loss of your client.
The IRS and a number of states are always seeking to reclassify IC’s as employees when auditing companies. Government agencies tend to make more money and receive that money faster from employees than they do from IC’s.
How can you protect your IC status when the IRS comes knocking on your client’s door? Many IC’s preserve their freedom and pre-tax benefits by becoming a member of IProfessional. As a member, IC’s can ensure that they and their clients are well protected against the risks of reclassification. To learn more about IProfessional view our video overview at www.iprofessional.com.
For IC’s who choose to go it alone by consistently following the guidelines below should have a good chance of protecting their IC status.
Look Like a Business: As an independent business you should use a business name, retain a business bank account, carry business insurance and set up your own benefit programs. It’s a good idea to go even further and show that you can market your services. Make up business cards and letterhead, join professional organizations and even set up a website.
Maintain Control of Your Work: A fundamental difference between an IC and an employee is that an IC is not supervised and controlled like an employee would be. Your client can certainly provide you with guidelines or details on what is expected from you, but how you achieve the results is up to you. Below are three basic guidelines to help you maintain control of your work:
When performing your job don’t ask the client for instructions
Unless the project demands your work be done at the client’s site you should decide where to work
Don’t receive training from the client
Work With Multiple Clients: Your IC status will rarely be questioned if you maintain multiple clients at once. If your services require you to focus on one project at a time then try to have more than one client within a year’s time. Five months at one and seven months at another, for example, is better than having just one client.
Written Agreements: Having a service agreement with your clients is good idea. The agreement should clearly state that you are working as an IC and that the client will not control how your work is done. An agreement will show the intent for an IC/client relationship, but will not fully protect your IC status.
Turn Down Employee Offers: There will be clients who will only engage you as an employee and not as an IC. Though it may be tempting to allow a client every once in a while to hire you as an employee, this can be the kiss of death to your IC status. Your past and future projects could be in jeopardy of reclassification.
What steps do you take to protect your IC status?